Federal Tax Reform to Be a Dizzying, Long Process

Mar 17th 2006

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You don’t have to be a tax practitioner to know that the federal tax code is in need of major overhaul. Indeed, the Bush Administration has been analyzing the issue for more than a year and its work has elicited a chorus of jeers and questions from the accounting profession and other interested observers.

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Change will not be made in one fell swoop, in one legislative year, but rather will be incremental, based on the reception that the President’s Advisory Panel on Federal Tax reform has been receiving.

Most recently, the Washington-based Center for Strategic Tax Reform reported that the underlying issues in any reform are much more political than in past years, which would indicate that change would be a series of many legislative battles. Because of the multiple issues underlying the tax reform issue today, political observers consider sweeping reform, “a high-risk proposition,” Executive Director Ernest S. Christian and Chief Economist Gary A. Robbins, write in an advisory on the group’s Web site http://www.cstr.org.

The underlying issues include providing for the massive amounts of Baby Boomers who are beginning to retire and will continue to cease working over the 15 years or so; Americans’ lack of savings; the pending expiration of temporary federal tax cuts made in 2001 and 2003, and projected exponential growth in Alternative Minimum Tax (AMT)revenues.

The President’s advisory panel admits that true reform will be a dizzying task, noting, “Not only is our tax system maddeningly complex, it penalizes work, discourages saving and investment, and hinders the competitiveness of American businesses,” and “is riddled with tax provisions that treat similarly situated taxpayers differently and create perceptions of unfairness.” Since the last major reform in 1986, the tax code has undergone more than 14,000 changes.

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Another indication that reform will be a drawn-out process came March 3 when U.S. Treasury Secretary John Snow announced that the Bush Administration has no set timetable for reform, “I think it’s awfully important to take the time that’s necessary to think this thing through. There shouldn’t be any rush to judgment here because what we’re dealing with is so important,” he said.

The American Institute of CPAs (AICPA), in its assessment of the work by Bush’s tax reform panel, has said one of the potential scenarios of tax reform is incremental change that “reforms the system rather than replaces it.” It says that a “bottom up" reform, would reach many tax reform goals by modifying the current income tax system.

A second approach, according to the AICPA’s report, would be to replace the entire current tax system or major parts of it, probably with any of several varieties of a consumption tax. Bush’s panel has recommended a separate Simplified Income Tax Plan “and the Growth and Investment Tax Plan” possibilities which, among other things, both call for eliminating the AMT; removing impediments to savings, and lower tax rates for individuals and businesses. The AICPA report, also lists 10 key matters any reform must address.

The New York State Society of CPAs has weighed in with its solution, proposed by a group specially convened to review the work of the President’s panel. The Committee on Practical Reform of the Tax System has proposed a Simple Exact Transparent Tax, or SET Tax, that would, according to an abbreviated description by the society, tax all incomes over a threshold established by law and “reduced by government-approved exclusions, at an economically appropriate and socially acceptable single rate.”